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2 Powering Africa through Feed-in Tariffs Advancing renewable energy to meet the continent s electricity needs February 2013 A Study for the World Future Council (WFC), the Heinrich Böll Stiftung (HBS) and Friends of the Earth England, Wales & Northern Ireland (FoE-EWNI). Authored by: Renewable Energy Ventures (K) Ltd., Nairobi, Kenya: Joseph Nganga, Marc Wohlert, Matt Woods Meister Consultants Group Inc., Boston, USA: Christina Becker-Birck, Summer Jackson, Wilson Rickerson Acknowledgement: This study is based on interviews with stakeholders in the energy field including policy makers, civil society representatives and private sector actors. Many of them are members of the African Renewable Energy Alliance AREA. Powering Africa through Feed-in Tariffs Commissioned by: Ansgar Kiene and Stefan Schurig (WFC), Patrick Berg (HBS) and Pascoe Sabido (FoE - EWNI) Chapter II is based on the publication Powering the Green Economy: The Feed-in Tariff Handbook by M. Mendonca, D. Jacobs and B. Sovacool (2009) and has been adapted for this book with kind permission of the authors. The copyrights remain with the original authors. All other texts in this book are published under a Creative Commons Attribution-Non-commercial-NoDerivs 3.0 Unported License. You can download an electronic version online. You are free to copy, distribute and transmit the work under the following conditions: Attribution you must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work), Noncommercial you may not use this work for commercial purposes, No Derivative Works you may not alter, transform, or build upon this work. For more information see licenses/by-nc-nd/3.0/ Cover and layout by NORTH45 Addis Ababa, Ethiopia Printed by Kaitoma Creatives, Johannesburg, South Africa, on 100% recycled paper.

4 Executive Summary Africa is facing an energy crisis: the existing production capacity cannot meet the growing demand for electricity. The electricity needed to power and grow the economy, drive local development and tackle urban and rural poverty is simply not there. In addition, traditional sources have become unreliable, unaffordable or increasingly unacceptable. Energy has been described as the missing millennium development goal that enables others to be achieved, yet according to the World Bank less than 25% of Sub- Saharan households have access to electricity, falling to 10% in rural areas. The traditional energy solution has relied on fossil fuels, yet not only are they becoming unaffordable, but their historic consumption by rich, industrialised nations is driving dangerous climate change. On the continent that has done least to cause it, the effects are already evident, increasing the frequency and severity of floods and droughts and impacting people s livelihoods. This has also undermined the generation capacity of one of the continent s major energy sources hydropower, which has also come under pressure because of its negative impacts on people and ecosystems. In finding a sustainable, affordable and reliable energy solution to meet its needs, Africa has the opportunity to leapfrog the dirty development pathways followed by countries in the global North and power its economies and its societies through renewable energy. The UN Secretary General Ban Kimoon said in September that Providing sustainable energy for all could be the biggest opportunity of the 21st century. Sustainable energy is the golden thread that connects economic growth, social equity, and a climate and environment that enables the world to thrive. Renewable Energy Feed-in Tariffs (REFiTs) have been successful at increasing the use of renewable technologies worldwide. REFiTs encourage investment in renewable energy generation from individual home owners and communities to big companies by guaranteeing to buy and pay for all the electricity produced. As of 2012, 65 countries have implemented some form of a REFiT, driving 64% of global wind installations and 87% of global photovoltaic installed capacity. While the majority of these installations have occurred in industrialised countries, particularly Europe, the African continent has significant untapped renewable energy potential. REFiTs have the potential to transform energy systems and societies in profound and tangible ways. When tailored to the local context, they can successfully increase overall energy production both on and off the grid, boost economic development and improve access to clean energy for all while avoiding the emission of green house gases and other problems related to dirty development. Moreover, the decentralized approach of REFiTs allows for alternative ownership and governance models and provides the opportunity to empower communities as well as refreshing local democracy and self-governance. Several African countries have already introduced the policy, and Chapter III explores the particular experiences of policy makers, private sector and civil society stakeholders in Algeria, Kenya, Mauritius, Rwanda, South Africa (which abandoned its REFiT in favour -1-

5 of a bidding process), Tanzania, and Uganda. Many more are either developing their REFiT or planning to, and Chapter IV similarly looks at the variety of stakeholder experiences in Botswana, Egypt, Ethiopia, Ghana, Namibia, and Nigeria. Challenges being addressed vary from country to country, as although they hail from the same continent, there is a great deal of difference between them. The case studies include a small-island state dependent on fuel imports (Mauritius), the continent s biggest carbon polluter who is facing international pressure to reduce its emissions (South Africa), countries with less than 3% rural electrification (Tanzania), and others with almost universal access to electricity (Algeria, Egypt). This means each will have different motivations for introducing a REFiT, as well as expecting distinct outcomes. The case studies highlight how the REFiT is able to meet the variety of challenges, as well as proposing stakeholder suggestions on how it could do more. Many of the surveyed countries face the challenge of low levels of electrification and dispersed rural populations. While this is problematic for traditional REFiTs designs, which presuppose a well-developed national grid, Tanzania has shown that REFiTs can also serve decentralised mini-grids (see Chapter VI). More than just providing clean and environmentally friendly energy, such policies also support wider socio-economic development in rural areas. Community-scale minigrids can provide all the benefits of the grid while encouraging greater levels of democratic control and ownership over local energy systems (see Chapter V). Africa faces other social, political and economic challenges than Europe, but our study shows that many of the REFiT design principles (explored fully in Chapter II) remain the same and can be adjusted to take account of specific country needs. Across the case studies, innovative solutions are being found to tackle broader problems that cannot be addressed through a REFiT policy alone. Project developers need access to more affordable financing options as well as locally available technical expertise for the initial design, installation and maintenance of their renewable energy power plants. Governments need to balance the need to keep energy prices low in particular in countries with high levels of poverty while offering sufficiently profitable tariff rates to attract private investment. Instead of passing on all costs to the end consumer, alternative sources of funding have been explored including levies on fossil fuels or international climate change funds. In some countries, the introduction of subsidies for lowincome households is also being discussed to avoid additional burdens for poorer citizens. The case studies in this book identify the drivers behind the introduction of REFiTs, present and discuss the particular policy design developed in each country and analyse both supportive and obstructive factors for a successful policy implementation. On this basis, it is possible to draw broader lessons for countries interested in developing their own REFiT: In order to build momentum for a REFiT policy, it is important to have high-level political support as well as buy-in from all other stakeholders. South-South learning exchanges involving ministries, utilities, regulators, financiers, project developers and community representatives have been a successful tool in this context. Broad coalitions involving civil society in addition to policy makers and private sector representatives have proven successful in designing and implementing REFiT policies that are resilient to changes in the political landscape. The success of a REFIT depends on an enabling environment. The policy should thus be an integral part of the country s wider development strategy. Awareness raising about renewable technologies in general and REFiTs in particular will help overcome scepticism. Moreover, a specific programme to build technical capacity of local companies should be implemented. A strong national value chain avoids expensive imports and provides economic benefits beyond the renewable energy sector. REFiTs are more than just guaranteed payments for renewable energies. They can promote rural electrification, increase overall generation capacity, provide greater grid stability or aim to promote inclusive economic and social development. These objectives are of course not mutually exclusive, but policymakers will have to decide on where their priorities lie and design the REFiT policy accordingly. As REFiTs may have to be adapted from time to time to keep up with changing circumstances, many of the following recommendations will also be of interest for countries with existing REFiT policies: REFiTs are complex policies and must balance overall policy goals with an incentive for investment. It is therefore important to allow all stakeholders to participate in the policy design. Special care should be taken to include civil society representatives in order to ensure that the policy meets the population s diverse needs. Policy makers should be very clear on the objectives they want to achieve with a REFIT. Design elements such as eligibility criteria, restrictions on plant size, differentiated tariffs by size or technology all influence which groups are likely to participate as well as the policy s overall impact and should thus be chosen carefully. Many renewable energy technologies have high initial investment costs, but are cheaper than fossil fuels in the medium and long term. This should be taken into account in the design and calculation of tariffs paid to REFiT project developers. When costs of a REFiT policy are passed on the end consumer, social transfer mechanisms should be put in place, i.e. energy-intensive users and the rich cross-subsidising affordable tariffs for low-income households. Otherwise, higher energy prices could undermine policy objectives of increasing energy access and tackling poverty. The overall costs of project development and the lack of affordable financing options have been identified as major constraints to project implementation across all countries. These issues must be addressed to ensure that REFiTs can realise their full potential to achieve greater renewable energy deployment. Governments and state-owned utilities can easily help lower the costs for individual project development by providing detailed information on the country s renewable energy potential. The publication of a national solar and wind atlases informs potential investors about suitable areas and reduces the costs for feasibility studies. Cumbersome and lengthy administrative processes are costly, delay project implementation and discourage investors. Streamlining the licensing process through a one-stop-shop at a lead agency and standardised contracts should be considered to lower transaction costs. This is especially important for smaller developers and community projects. Credible guarantees for the power purchasing agreements under a REFiT raise confidence of banking institutions and can facilitate longer-term loans at affordable interest rates. Governments should explore how international donors and climate finance instruments could provide such guarantees, as well as funds for the wider national REFiT schemes

6 Noble actions are many, but the most noble of them all is in the uplifting of the suffering of the masses and enabling the pursuit of a decent life. Energy poverty is widespread in many parts of Africa though the continent is blessed with enormous and varied resources of energy. It is estimated that on average about 70% of Africa population lacks access to modern and clean forms of energy; a situation which cannot be further allowed as the population rapidly expands. Energy accessibility varies widely across Africa; reaching over 95 % in some parts of North Africa and as low as 5% in Sub-Saharan Africa, (IEA, 2011). Energy availability, affordability, accessibility and security are fundamental requirements for any meaningful economic and social development, and requires a sound and reliable mix of energy sources. Africa has 15% of the world s population but accounts for only 3% of the world s primary energy consumption if we exclude biomass like wood and charcoal. Electricity consumption per capita is one sixth of the world s average, with the whole of Sub-Saharan Africa only consuming as much electricity as the state of New York far less if we exclude South Africa. The Continent therefore needs to bring about a major expansion of its already well identified energy potential. Low levels of access to sustainable modern energy throttle economic and social development. Access to sustainable forms of energy is essential for the provision of clean water, sanitation and healthcare and is central to addressing today s global development challenges. Energy access enables the provision of vital services needed for development in the form of lighting, heating, cooking, food processing, mechanical power, transport and telecommunication. More than half of Africa s people currently lack access to electricity Foreword - Prof. M. M. Elmissiry - and for more access is either unaffordable or unreliable. Such a situation calls for a massive increase in energy generation, both to existing grids and also new decentralised solutions beyond the grid, sustainably using all energy resources available to Africa to correct this grim picture and to lift millions of people out of poverty. Energy demand in many parts of Africa exceeds supply by far, resulting in load shedding and loss of productivity, costing thousands if not millions of preciously needed jobs. Africa s population is growing at an alarming rate, increasing the demand on energy and compounding the energy shortage problems. The challenges of securing investment required to meet both the need to increase access to clean energy and the rapidly growing demand in a sustainable way are formidable. It is estimated that at least US$40 billion is needed annually in the power sector to meet future demand, which compares with a current annual investment of less than one quarter of this amount. The world is increasingly turning its attention towards renewable energy. This transition offers an array of economic, social, and environmental advantages, and so technologies are rapidly evolving, as is innovation to adapt renewable energy systems to Africa s realities. Renewable energy is freeing national economies from the burden of petroleum purchases, creating new economic opportunities at all scales, and preserving the environment. In Africa, we are presented with the opportunity to not simply imitate the global North but to tread a higher path, one that leapfrogs the dirty development followed by so many. Renewable technology allows us to instead build a resilient, sustainable future that meets the needs of this generation and the next. In spite of the abundant resources of renewable energy in Africa, its share of primary energy supply is less than 1% (biomass and hydro excluded).this calls for a radical change in the approach followed in the development and use of renewable energy resources. The main challenge faced by solar and wind technologies is the price gap when compared with well-established fossil fuel generators. Measures have to be taken to attract investment in decentralised as well as centralised renewable energy production where policy attention to date has been focused in order to mitigate the price risk gap, promote the use of renewables and answer Africa s energy needs. While renewables may face high upfront investment costs compared to fossil fuel generation, once installed the fuel source is largely free. This is where special Renewable Energy Feed-in Tariffs (REFiTs) can come in as a policy instrument that attracts investment in sustainable, renewable electricity production. Nothing is more effective in the development of a renewable energy policy than learning from those countries that went through the same exercise, and to access their lessons learned and experiences gained. It is my honour to write a foreword for this book which gives the valuable information required to ensure the use of the continent s abundant environmentally friendly energy resources to reduce energy poverty in Africa. The book remains accessible to non-technical readers while delving deep into a policy with the potential to transform the development and usage of renewable energy resources; namely the Renewable Energy Feed-in Tariff policy (REFiT), its various forms and how it can be implemented in the African context, with all its challenges Some countries in Africa have already introduced REFiTs, experiencing numerous challenges during its development and implementation. Nothing is more effective in the development of a renewable energy policy than learning from those countries that went through the same exercise, and to access their lessons learned and experiences gained. There is no one size fits all and REFiTs differ in their design to incorporate the varying situations and environments. In Africa, this can be the differing severity of energy shortages, or how far the national grid extends to cover rural areas and what solutions exist beyond the grid. It is pleasing to note that this report documents such valuable experiences. The book draws on case studies from across the continent to demonstrate how the REFiT operates as a policy instrument, how it can deliver on the energy needs of African countries, how effective it is in creating a conducive environment for investment in renewable energy generation, and to offer countries with and without a REFiT access to the lessons and experiences gained both positive and negative is the year in which the UN Secretary General has launched the Sustainable Energy for All initiative, aiming to deliver universal energy access by Another of its objectives is to double the use of renewable energy. With the development of REFiTs in Africa as part of a comprehensive package of renewable energy policies, both complimentary goals can be met if not surpassed. The launch of this book on renewable energy feed in tariffs will hopefully go a long way towards making that a reality and UN initiative delivers on both climate and energy access through decentralised renewable energy. Prof. M. M. Elmissiry, Head of Energy Programme New Partnership for Africa s Development (NEPAD)

7 CHAPTER I -7-

8 Addressing Africa s Energy Challenge Energy has been described as the missing Millennium Development Goal (MDG), the catalyst without which other goals on issues such as health, education and gender equality cannot be achieved. Studies show that access to modern energy services, and particularly electricity, has a positive effect on local economic development and closely correlates to a country s UN Human Development Index. 1 Most countries in Africa lack the infrastructure to reliably meet the electricity demands of both its economy and its population. According to the World Bank, access to electricity for households in Sub-Saharan Africa is less than 25%, falling as low as 10% in rural areas. The vast majority of people thus continue to rely on traditional biomass and kerosene. The impact of smoke inhalation 1 UNDP, from indoor cooking and kerosene causes more deaths than HIV/AIDS, malaria and tuberculosis. 2 Insufficient electricity supply also hampers economic development. A survey of businesses across sub-saharan Africa shows that access to reliable, affordable electricity is the biggest obstacle to operations 3 (see graph). Figure I.1: Biggest obstacles to firms in SSA. Numbers rounded. Source: African Development Bank, African Economic Outlook 2012: Promoting Youth Employment, OECD Publishing. OLD RECIPES WON T WORK Policy makers all over the continent - from national governments, regional organisations and the African Union (AU) accept the urgency of the problem and have taken steps to address the energy shortage. Ambitious visions have been published, promising both 2 WHO, African Development Bank (2012): African Economic Outlook 2012: Promoting Youth Employment, OECD Publishing. a drastic increase in overall production capacity and improved access to electricity in urban and rural areas. Traditionally, decision-makers have chosen large-scale hydropower and fossil fuel plants for electricity production and centralised national grids for its distribution. It is not surprising that these approaches also feature prominently in the newly adopted action plans, such as the AU s Hydropower 2020 Initiative. However, large hydropower projects have increasingly been criticised for their negative social and environmental effects. Moreover, prolonged droughts in recent years have made hydropower less reliable, especially during dry seasons. In years to come, climate change will lead to more extreme weather patterns, increasing the frequency and severity of floods and droughts. 4 Further fossil fuel plants would only exacerbate climate change and its negative consequences to water supply, agricultural production and overall livelihoods. Most countries would also increase their dependence on oil imports and thus make their economies more vulnerable to external shocks due to highly fluctuating international prices. 5 ADDING RENEWABLE ENERGY TO THE MIX The solution to Africa s energy crisis calls for new types and a better mix of energy sources. While some countries have been considering nuclear power, the promises of supposedly low production costs are no more than a myth if hidden costs and the problems of nuclear waste disposal are taken into account. 6 The recent explosion of the Japanese nuclear plant in Fukushima has also recalled the risk of accidents and their catastrophic consequences. 4 DARA (2012) Climate Vulnerability Monitor: A guide to the cold calculus of a hot planet, Fundación DARA Internacional. Madrid 5 ESMAP (2005): The Vulnerability of African Countries to Oil Price Shocks: Major Factors and Policy Options. The Case of Oil Importing Countries. The World Bank Group. Washington DC 6 Rosenkranz, 2010 On the other hand, renewable energy technologies have been emerging as an increasingly viable option to complement and eventually replace traditional sources. Renewable sources such as the wind and sun are infinitely abundant and free. The technologies needed to turn them into electricity have overcome teething problems and are now being successfully employed on an industrial scale. Renewable sources currently provide 16.7% of global energy needs 7 and are of growing importance in both developed and developing economies. Even solar PV, often considered one of the more expensive technologies, is already cheaper in many instances than diesel or petrol generators, which are often relied on for base load in rural areas, as well as bridging gaps in power production in urban areas. Recent market trends show prices have tumbled over the last decade for key technologies such as solar PV and onshore wind power and will continue to do so. Given that oil prices are expected to rise steadily, the competitiveness of renewable technologies will only continue to improve. A large share of renewables in the national energy mix will make economies less dependent on external supplies, can help stimulate local employment and can free up budget resources for other development goals. Given the high costs of long-distance transmission lines, it is often not economically viable to connect remote rural areas to the national grid, thus cutting off these regions from the services that affordable and reliable electricity can provide, not to mention broader economic development. However, small-scale power production based on locally available renewable energy sources could overcome these obstacles. Off-grid and mini-grid solutions would not only provide clean energy, but also create local employment in maintenance and administration, as well as boosting the local economy. Local ownership and control of mini-grid solutions has the potential to transform communities 7 REN21 (2012): Renewables 2012 Global Status Report. Paris

9 Bibliography through increased democratic participation and quite literally handing power to the people. PROMOTING RENEWABLES Promoting renewable energy technologies and a flexible mix of on-grid and off-grid solutions could help African countries leapfrog the dirty development pathways to the most modern technologies, avoiding the environmental problems of unsustainable energy sources and unnecessary cost of longdistance transmission lines to remote areas. Renewable technologies have extremely low operational costs and are often more costeffective than traditional technologies in the long run. However, the initial capital requirements are often very high and thus pose an obstacle for many investors. In order to realize the full potential of renewables, governments will have to provide an enabling policy environment, encouraging and supporting wide-spread investment. Renewable Energy Feed-in Tariffs (REFiTs) have proven to be successful policy tools in this respect. Simply put, a REFiT encourages independent power producers companies, communities and even individual citizens to invest in renewable energy technology by guaranteeing that all the energy produced will be bought at a fixed and profitable price. The main features of REFiTs are explained in more detail in chapter II. The REFiT concept is highly adaptable and can be adjusted to different national circumstances and a variety of policy preferences. It can thus function well in both developed and developing countries, provided that proper care is taken in the policy design and accompanying policies. This book presents case studies of a number of African countries that have either already introduced REFiTs (chapter III) or are planning to do so (chapter IV). Special attention is given to the opportunities of mini-grid solutions aimed at increasing access to electricity in rural areas (chapter V), including a case study of the Tanzanian REFiT law (chapter VI). Lessons learned from these examples will be discussed in the concluding chapter, formulating recommendations for policy makers considering to introduce similar policies in their home countries. Adkins, E., Oppelstrup, K. & V. Modi (2012): Rural household energy consumption in the millennium villages in Sub-Saharan Africa. Energy for Sustainable Development African Development Bank (2012): African Economic Outlook 2012: Promoting Youth Employment, OECD Publishing. Barnes, D.F. (2011): Effective solutions for rural electrification in developing countries: Lessons from successful programs. Current Opinion in Environmental Sustainability 3. p Bodansky, D. (2003): Climate Commitments - Assessing the Options. Aldy, J. et al: Beyond Kyoto. Advancing the international effort against climate change, Pew Center for Global Climate Change. P Bugaje, I.M. (2006): Renewable energy for sustainable development in Africa: a review. Renewable and Sustainable Energy Reviews 10. p Deichmann, U., Meisner, C., Murray, S. & D. Wheeler (2011): The economics of renewable energy expansion in rural Sub-Saharan Africa. Energy Policy 39. p Ergas, H. (2012): Policy Forum: Designing a Carbon Price Policy: Using Market-Based Mechanisms for Emission Abatement: Are the Assumptions Plausible? Australian Economic Review, 45: ESMAP (2005): The Vulnerability of African Countries to Oil Price Shocks: Major Factors and Policy Options. The Case of Oil Importing Countries. The World Bank Group. Washington DC. Green, T.R., Taniguchi, M., Kooi, H., Gurdak, J.J., Allen, D.M., Hiscock, K.M., Treidel, H. &A. Aureli (2011): Beneath the surface of global change: Impacts of climate change on groundwater. Journal of Hydrology 405. p Hendrix, C.S. & S.M. Glaser (2007): Trends and triggers: Climate, climate change and civil conflict in Sub-Saharan Africa. Political Geography 26. p IEG (2008): The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits. The World Bank. Washington DC. IPCC (2007): Climate Change 2007: Synthesis Report. Fourth Annual Report. IPCC (2012): Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaption. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change. (Cambridge University Press) Cambridge, New York. Lighting Africa (2012): Lighting Africa Progress Report. 1 July June Mahapatra, S. & S. Dasappa (2012): Rural electrification: Optimising the choice between decentralized renewable energy sources and grid extension. Energy for Sustainable Development 16. p Marchiori, L., Maystadt, J.-F.& I. Schumacher (2012): The impact of weather anomalies on migration in sub-saharan Africa. Journal of Environmental Economics and Management 63. p Martinez, D.M. & B.W. Ebenhack (2008): Understanding the role of energy consumption in human development through the use of saturation phenomena. Energy Policy 36. p Mendonça, M., Jacobs, D. & B. Sovacool (2010): Powering the Green Economy. The Feed-in Tariff Handbook. (Earthscan) London. OECD &IEA (2010): Energy Poverty. How to make modern energy access universal? Special early excerpt of the World Energy Outlook 2010 for the UN General Assembly on the Millenium Development Goals. Paris. Olmstead, S. & R. N. Stavins (2010): Three Key Elements of Post-2012 International Climate Policy Architecture. Discussion Paper , Cambridge, Mass.: Harvard Environmental Economics Program, July, Prasad, G. (2011): Improving access to energy in sub-saharan Africa. Current Opinion in Environmental Sustainability 3. p REN21 (2012): Renewables 2012 Global Status Report. Paris. Rosenkranz, G. (2010): Myths about nuclear energy, Edited by the Heinrich Böll Foundation, Brussels Salehyan, I. & C.S. Hendrix (2010): Science and the International Politics of Climate Change. The Whitehead Journal of Diplomacy and International Relations 11 (2). p UN (2011): Resolution adopted by the General Assembly. Sixty-fifth session. Agenda item 20. UNDP (2012a): Africa Human Development Report. Towards a Food Secure Future. New York. UNDP (2012b): Assessing Progress in Africa toward the Millenium Development Goals. UNDP (2012c): Feed-In Tariffs as a Policy Instrument for Promoting Renewables and Green Economies in Developing Countries. UNDP (2012d): Integrating Energy Access and Employment Creation to Accelerate Progress on the MDGs in Sub-Saharan Africa. New York. UNDP & WHO (2009): The Energy Access Situation in Developing Countries: A Review Focusing on the Least Developed Countries and Sub-Saharan Africa. New York. UNEP (2012): Global Trends in Renewable Energy Investment. Frankfurt School of Finance and Management. World Bank (2009): Making Development Climate Resilient: A World Bank strategy for Sub-Saharan Africa. Sustainable Development Department. Washington, DC. World Bank (2010): Development and Climate Change. World Development Report Washington, DC. World Meteorological Organization (2012): WMO statement on the status of the global climate Geneva

10 CHAPTER II -13-

11 Design Options For Renewable Energy Feed-In Tariffs This chapter is based on the publication Powering the Green Economy: The Feed-in Tariff Handbook by M. Mendonca, D. Jacobs and B. Sovacool (2009), drawing mostly on examples from Europe and North America. While the principles of designing a REFiT are universal, lessons from industrialized countries may not all be applicable in other parts of the world. The case studies provided later in this book will discuss the general principles in an African context. The main objective of all REFiT schemes is to attract investment in renewable energy generation. However, policies differ widely in the details depending on various additional policy goals. Such goals can be technical (such as the desirable number of new power plants to limit negative effects on grid stability) or social (improved access to clean energy in rural areas, etc.). Policymakers should be clear on the objectives they want to achieve with a REFIT and keep them in mind when considering the main elements of the policy. This chapter provides an overview of the most important design elements which legislators should consider when drafting or improving REFiT legislation: 1 eligible technologies; eligible plants; financing mechanisms; tariff calculation methodology; purchase obligations; priority grid access; cost-sharing methodology for grid connection; effective administrative procedures; 1 Mendonça, M., 2007; Roderick, P. et al, 2007; Sösemann, F., 2007; Grace, R. et al, 2008; Klein, A. et al, 2008; Fell, H.J., 2009b setting targets; and progress reports. In countries with a relatively short history of renewable energy development and those establishing a REFiT scheme for the very first time, we recommend keeping the support mechanism simple at the start. The policy should be easy to understand as REFiTs invite all parts of a society to become electricity producers, ranging from private households and communities to large utilities. Therefore, the legislation should be understandable to anyone without the assistance of legal expertise. At a later stage, the REFiT might have to become more complex, but by then stakeholders will have become experienced with this type of support scheme. A good example of this increase in complexity over time is the German REFiT scheme. While the first REFiT law from 1990 included only 5 articles, the number increased to 13 in 2000, 21 in 2004, and a staggering 66 articles in This was to account for issues connected to better market integration, grid connection, and tariff differentiation. ELIGIBLE TECHNOLOGIES As a first step, legislators will have to decide which renewable energy technologies they want to support, i.e. which technologies will be eligible for tariff payment under the REFiT scheme. In order to make this decision, there should be good knowledge about the potential and resource availability of each technology in a given region or country. National wind and solar maps (along with other resource maps) can be very useful for this purpose. Generally, it is recommended to support a whole basket of renewable energy technologies, instead of focusing on just one or two technologies which are currently the most cost-effective. This point should be repeated for emphasis: one of the key ways REFiTs lower costs later is by producing a diversified set of technologies now. In essence, a REFiT is a tool for technology development and cost reduction. It is one of the major advantages of REFiT schemes that the technology-specific approach allows for the development of a wide range of technologies at relatively low costs. If you are planning to have a large share of renewables in the future electricity mix, you will need a variety of different technologies. By supporting both fluctuating technologies, e.g. wind energy and solar, and technologies that are more constant, e.g. biomass, solar thermal, geothermal, and hydroelectric, you can lay the foundation for a 100% renewables-based electricity system at an early stage. Nonetheless, some regions or countries opt for supporting only one technology with a REFiT. This is usually the case if additional support mechanisms are available for other technologies. A REFiT for only one technology such as photovoltaics (PV), however, includes certain risks mainly related to public acceptance if the cost of the policy is passed through to bill payers. As the electricity costs for PV are significantly higher than that of conventional energy and other renewable energy technologies 2, and the amount of electricity produced is comparatively small, the additional costs as distributed by financing mechanisms might seem rather high to consumers. In contrast, if a large portfolio of technologies is eligible under the REFiT legislation, the average cost for one unit of renewable electricity is rather low. To a certain extent, more mature technologies such as wind power will help less mature technologies such as PV to be developed. In this way 2 The cost for PV systems has drastically reduced in recent years and is predicted to fall even further. This is at least partly a success of REFiT policies: through financing the initially expensive technologies they have increased demand and production, which led to a decline in overall cost. public acceptance can be strengthened. When defining the technologies eligible under the REFiT legislation, it is important to include precise definitions. This is especially true for biomass/waste and PV installations. The term biomass incorporates a large variety of resources, such as forestry products, animal waste, energy crops, and sometimes municipal wastes. Policy-makers have to decide upon the eligibility of impure biomass and waste material. Generally, the non-biodegradable fraction of waste is not eligible for tariff payment. In the case of PV, advanced REFiT schemes differentiate between certain categories, i.e. ground-mounted vs. building-integrated PV (BIPV). ELIGIBLE PLANTS Besides eligible technologies, those designing REFiTs will have to determine which plants are covered under the REFiT scheme. Usually, tariff payment only applies to generation plants in the given region or country. In this case of offshore wind turbines, the national territory can either be limited by the UN definition of Territorial Waters, i.e. 12 nautical miles offshore, or the Exclusive Economic Zone, i.e. 200 nautical miles offshore. Moreover, the policy maker usually limits tariff payment to the size, i.e. the installed capacity of renewable energy plants. Especially in the case of hydropower, tariff payment can be granted only to plants up to a certain maximum capacity, e.g. 20 or 100MW. The reason for this is that largescale hydropower is already slightly more competitive with conventional energy sources even without any financial support in areas with large resources. One unit of hydropower-based electricity can often be produced at costs as low as 0.02 or 0.03/ kwh, whereas onshore wind and landfill gas electricity (the next cheapest sources) cost about /kWh. Besides, large-scale hydropower projects are more capital-intensive and have more significant environmental impacts than other renewables, meaning policy-makers may want to consider

12 excluding them from REFiT schemes. Largescale hydropower projects also have negative environmental impacts, especially on downstream areas, and cause social problems to the displacement of people living in the project area. Under certain conditions, the reservoirs can also emit significant amounts of greenhouse gases. Thus, large-scale hydro is often not considered a renewable energy source. Some REFiT schemes also apply other limitations. The Spanish REFiT scheme, which stopped accepting new applications in January 2012, only grants tariff payment for installations with a maximum capacity of 50MW. These limitations often have historical reasons. In the past, it was believed that renewable energy could only cover a small share of the electricity mix and that, by definition, renewable energy power plants had to be small-scale and distributed. The recent experience in many countries, however, contradicts these assumptions. Even though the distributed application is still one of the major advantages of renewables, the development in wind energy shows that wind farms with several hundred megawatts of installed capacity are feasible and economically viable. Large-scale plants are also expected for other technologies, such as solar PV, Concentrated Solar Power (CSP), geothermal and biomass. Therefore, we suggest not including limits on plant size other than for large-scale hydropower. Instead, tariffs should be differentiated according to the size of each plant. Eventually, renewable energy capacity will have to replace large-scale conventional electricity plants, with no limits to be placed on either plant size or overall installed capacity. The start of generation, i.e. the moment the installation gets connected to the grid, also determines whether a plant is going to be covered by the REFiT. We recommend only including newly installed capacity as old renewable power generation plants are likely to have profited from previous support instruments. Therefore, the coming into force of the legislation usually sets the starting point for eligible plants. Theoretically, it is also possible to exclude certain producer groups from tariff payment. In the first German REFiT law of 1990, for instance, the legislator decided to exclude plants where publicly owned utilities owned a significant share. This can be an appropriate step where regulators plan to liberalise electricity markets and wish to allow new actors to become competitors to well-established national utilities. However, we recommend avoiding the exclusion of any producer group from tariff payment. The open, participatory and democratic nature of REFiTs is one of their most important characteristics. It also, by definition, ensures that renewable energy penetration is greater as more utilities are bound by the REFiT. FINANCING MECHANISMS A main feature of traditional REFiTs is that additional costs caused by the policy are distributed equally among all electricity consumers. This financial burden-sharing mechanism permits the support of large shares of renewable electricity with only a marginal increase of the final consumer s electricity bill. No government financing is included under these conditions. Moreover, by determining tariff payment and establishing the purchase obligation for all renewable energy by the existing utilities, the national government only acts as a regulator of private actors in the electricity market. Alternative financing mechanisms have proven to be sensitive towards external effects, such as changes in government or general economic downturns. However, in the context of developing countries with high levels of poverty, distributing the costs of a REFiT solely to consumers is likely to have serious negative consequences and would jeopardise efforts to increase energy access. Thus, innovative financing mechanisms - including co-funding from international climate change funds (Uganda), additional taxes on fossil fuels (Algeria) or subsidies for low-income households (Ghana) will be discussed in country case studies. In order to pass the price from the producer of renewable electricity to consumers, the costs (the aggregated tariff payments) must be passed along the electricity supply chain. First, the producer of renewable electricity receives the tariff payment from the local grid operator. By legal obligation through the REFiT scheme, this grid operator is obliged to pay for, connect and transmit the produced electricity. Normally, renewable electricity producers get connected to the next distribution system operator (DSO). In some cases, however, a producer of a large plant might also decide to connect directly to higher voltage lines through the transmission system operator (TSO). Afterwards, the costs and the accounting data are passed to the next highest level in the electricity system until the national TSO aggregates all costs and divides it by the total amount of renewable electricity produced. TARIFF CALCULATION METHODOLOGY One of the most urgent questions for policymakers dealing with REFiTs is how to get the tariff level right. A tariff that is too low will not spur any investment in the field of renewables while a tariff that is too high might cause unnecessary costs for consumers. We recommend developing a joint framework for all technologies eligible under the REFiT scheme in order to guarantee transparency and comparability. Regulators (and the consultants and economists they frequently employ) have applied different methodologies for tariff calculations. Less successful tariff calculation methodologies are setting the tariffs based on the existing electricity price or avoided costs. Another methodology bases the tariff on the actual cost of generation plus a small premium, thus offering sufficient returns on investment. Empirical evidence shows countries using the latter method have been most successful in increasing the rollout of renewable energy. This approach will hence be considered as best practice. Different names have been used to describe this tariff calculation approach based on actual costs and profitability for producers. The German REFiT scheme is based on the notion of cost-covering remuneration, the Spanish support mechanism speaks of a reasonable rate of return, and the French profitability index method guarantees fair and sufficient profitability. Despite the variety in names and notions, in all cases the legislator sets the tariff level in order to allow for a certain internal rate of return, usually between a 5% and 10% return on investment per year. In some cases the rate will have to be higher as the profitability of renewable energy projects should be comparable with the expected profit from conventional electricity generation. Only if the profitability of renewable energy generation is similar to or higher than that of nuclear or fossil plants will there be an economic incentive to invest in cleaner forms of energy. When determining the tariff for a new REFiT, an analysis of countries with similar resource conditions and existing REFiT policies might be useful first step. Therefore, we have included a lot of tables with data relating to real tariffs in the country case studies presented in this book. If, for instance, the neighbouring country has a well-functioning REFiT scheme, the tariff applied in this country might serve as a point of reference. Be warned, though, that the mere comparison of tariff levels will not be sufficient. Many other design options which will have an impact on the profitability of a project have to be taken into account, including the duration of tariff payment, grid connection costs and administrative procedures. After a good frame of reference is established for tariffs, cost factors related to renewable electricity generation have to be evaluated. We recommend basing the calculations on the following criteria: Investment costs for each plant (including material and capital costs); Grid-related and administrative costs (including grid connection cost, costs for

13 Figure 2.1 German methodology and input variables for calculating electricity production costs Source: BMU, 2008 Investment cost for plant and peripherals Interest on capital (composite interest) Service costs Review period Replacement investment Operating life Etc Capital costs Total annual costs [ /a] Financial/Mathematical framework assumptions the licensing procedure, etc); Market price for inputs Specific fuel requirement Equivalent hours of operation at full capacity Requirement for ancillary inputs and energy Residual materials and disposal costs Etc Consumption-related costs Operation and maintenance costs; Fuel costs (in the case of biomass and biogas); and Decommissioning costs (where applicable). Calculation model (annuity-based) Based on this data, the nominal electricity production costs for each technology can be calculated. Tariff calculation methodologies are rather technical but certainly interesting for all committed policy-makers. As an Cleaning and maintenance costs Personnel requirement Insurance and administration Other variable ancillary costs (e.g. lubricating oil) Unforeseen costs Etc Operating and other costs Electricity model costs [ /kwh] Average costs for all periods Revenue from heat generated in CHP plants Savings on disposal costs of fermentation residues Specific product prices Etc Proceed Total annual proceeds [ /a] example, we are going to present the German approach for tariff calculation for industrialized nations. 3 Under the German REFiT scheme, a transparent tariff calculation methodology was developed based on the electricity generation costs. Generally, tariff payment is guaranteed for 20 years at the level applicable in the first year of production. However, the tariff applicable for new projects is revised every four years based on Progress Reports (see below). 3 3 The European Photovoltaic Technology Platform has developed a tool to calculate REFiTs for PV. The excel spreadsheet discloses all the key assumptions behind the tariff calculation model. www. eupvplatform.org/pv-development/tools.html and. For the setting of the tariff, both the Ministry for the Economy and the Ministry for Environment (BMU) commission studies by various independent research institutes. In addition, wide-ranging surveys on costs are conducted among producers of renewable electricity. The results are cross-checked with published cost data and empirical values from project partners of the ministries. In this way, the average generation cost of plants is evaluated. To finally determine the tariff level 4, several parameters are compiled, including output data of average plants currently in operation, the purchasing costs for fuel in the case of biomass and biogas, investment cost (machinery, construction, gridconnection, etc), and operation cost (see figure 2.1). Germany applies this annuity method to calculate the electricity generation costs for all renewable energy technologies except wind energy. This method of dynamic investment calculation allows for translating one-off payments and periodic payments of varying amounts into constant, annual payments 5. For wind power, the net present value method is applied in order to take the large variation in payment over the 20-year period into account. This variation is mostly due to a higher tariff payment in the first years of operation. All costs for renewable electricity generation are calculated on a real basis, adjusting them to inflation based on a specific reference year. Even though the German RE- FiT is not explicitly inflation indexed, the effects are counterbalanced by the calculation method. TECHNOLOGY-SPECIFIC TARIFFS If the policy maker calculates the tariffs based on the generation cost of renewable electricity, technology-specific tariffs are the natural result. Technology-specific support is one of the main features of many REFiTs. In 4 4 The German REFiT scheme has the rank of a law. Therefore, the initial proposal of the Ministry has to pass through the government and parliament and might therefore changed during the consecutive political decision-making process. 5 BMU, 2008 contrast to other quantity-based support schemes, such as tradable certificates, RE- FiTs try to take the technology-specific generation costs into account in order to promote a broad base of different technologies. Technology-specific support is necessary because of the large differences in generation costs among renewable energy technologies. While certain types of biomass or biogas can already be produced for less than 0.03/ kwh, less mature technologies are produced at much higher cost. However, from the costs for photovoltaics have more than halved from 0.43/kWh to 0.19/kWh not least because of the positive impact of RE- FiTs. 6 Further differentiation might be necessary within the generic group of biomass products. As mentioned above, biomass fuel types include forestry products, animal waste, energy crops, and sometimes waste or the biodegradable fraction of waste. Generation costs vary widely as, for instance, energy crops are generally more expensive than residues from forestry, and producing biogas from animal residues is more expensive than the generation of landfill or sewage gas. Therefore, some REFiT schemes take different fuel types for biomass plants into account. In addition, the cost for different transformation processes of biomass to electricity, such as co-combustion and gasification, might have to be reflected in the tariff design. SIZE-SPECIFIC TARIFFS Besides technology-specific tariffs, many RE- FiT schemes include different remuneration levels for different sizes of a given technology. The underlying idea is that larger plants are generally less expensive. Therefore, most REFiT schemes set specific tariffs for a particular technology in relation to plant size. The easiest way is to establish different groups according to the installed capacity. The choice for the range of each group does 6 compare Ragwitz, M. et al, 2007 and BNEF,

14 not necessarily have to be random. Many technologies offer standard products of a certain size range. In the case of PV, for instance, a typical rooftop installation for private households has a capacity of 3-30kW. Larger-scale rooftop installations for industrial buildings or farms usually have an installed capacity of up to 100kW. Therefore, an analysis of standard products of a certain technology in a given region or country will help to set plant-size-specific tariffs. In order to avoid potential disruptive effects through size categories, the legislator also has the option to develop a formula which relates the plant size to the tariff payment. DURATION OF TARIFF PAYMENT The duration of the tariff payment is closely related to the level of tariff payment. If a legislator desires a rather short period of guaranteed tariff payment, the tariff level has to be higher in order to assure the amortization of costs. If tariff payment is granted for a longer period, the level of remuneration can be reduced. However, in the case of longer payments inflation will be greater and must be factored in. REFiTs around the world usually guarantee tariff payment for a period of years, while a period of years is the most common and successful approach. A payment of 20 years equals the average lifetime of many renewable energy plants. Longer remuneration periods are normally avoided because otherwise technological innovation might be hampered. Once tariff payment ends, the producer will have a stronger incentive to reinvest in new and more efficient technologies instead of running the old plant in order to receive tariff payment. However, producers normally have the right to continue selling electricity under standard market conditions. When fixing the duration of tariff payment, policy-makers should clearly state whether producers have the right to leave the REFiT scheme during the guaranteed payment period. This might be of interest for renewable electricity producers if the spot market power price for grey electricity, i.e. fossil or nuclear power, rises above the guaranteed REFiT as selling electricity on the open market could be more profitable. In countries which have started to incorporate the negative external costs of fossil fuels and remove subsidies for conventionally produced electricity, this will probably start to occur more in coming years, especially for the most costeffective renewable energy technologies such as wind energy and landfill gas capture. In this case, legislators basically have three options: 1. They can mandate that the REFiT duration period has to be fulfilled and the renewable electricity producer does not have the right to enter the grey power market. The positive effects of this approach are the lower electricity costs for final consumers, once the power price for conventional power exceeds the guaranteed tariff level. In this case, the REFiT will stabilize and lower the average electricity price. However, such a policy could delay the integration of green electricity into the grey power market as developers will be getting less for their renewable electricity. 2. Regulators can state that the renewable electricity producer has the right to leave the REFiT but no right to re-enter the REFiT scheme. This would in essence complicate the participation of renewable electricity producers in the conventional grey market as future prices might be difficult to anticipate. The legislation can give the producer the opportunity to switch between the guaranteed remuneration under the REFiT and the participation within the spot market for electricity. By those means, the producer can gather first-hand experience in the power market without being exposed to all risks related to volatile market prices. In this case, regulators would determine a time period in which the producer is allowed to change between both systems, such as once every month or once every year. Figure 2.2 General flow of electricity and financing under REFiT schemes Note: RES-e = electricity from renewable energy sources. Source: Jacobs, 2009 PURCHASE OBLIGATIONS Besides long-term tariff payments, the purchase obligation is the second most important ingredient for all REFiT schemes as it assures investment security. It obliges the nearest grid operator to purchase and distribute all electricity produced by renewable energy sources, independent of power demand. This means, for instance, that in times of low demand, the grid operator will reduce the amount of grey electricity while all green electricity is incorporated into the electricity mix. The purchase obligation is especially important for more variable renewable energy technologies, such as wind and solar PV, as the producer cannot control when the electricity will be generated. In contrast, gas and coal and nuclear power plants can increase and reduce output, as can hydroelectric dams, biomass facilities and geothermal power stations. Therefore, advanced REFiT schemes sometimes include tariff differentiation according to electricity demand (Demand-Oriented Tariff Differentiation). The purchase obligation protects renewable electricity producers in monopolistic or oligopolistic markets where the grid operator might also dispatch power generation capacity. When decisions are made about which power generation sources to use to meet electricity demand, such grid operators might be biased and dispatch power RES -e producer Electricity Electricity Electricity Electricity Money DSO Money Money Money Money Electricity TSO Supply Company Final Consumer from their own power plants first. As an example of a well-designed purchase obligation, the German REFiT establishes an obligation to purchase, transmit and distribute all electricity produced under the REFiT scheme. PRIORITY GRID ACCESS Unfair grid access rules are often a barrier in power markets where the grid operator itself is engaged in power production. This lack of unbundling generation, transmission and distribution might lead to a situation where the grid operator prioritizes its own generation units when it comes to the question of which power plant will get connected to the grid. Therefore, REFiTs usually include provisions that eligible plants must be connected to the grid. The German REFiT scheme, for instance, states that grid system operators shall immediately and as a priority connect plants generating electricity from renewable energy sources. We recommend this approach as the immediate connection prevents delays by the grid operator and priority connection enables renewable energy plants to get connected to the grid before conventional power generation units. Equally, the lack of transmission capacity can seriously offset the deployment of renewables. This is especially true in many African

15 Figure 2.3 Percentage of grid integration costs compared to total investments Source: GreenNet-Europe, undated countries. However, existing bottlenecks in the grid should not be an excuse to restrict access for green electricity producers, but rather be an incentive to undertake much needed grid reinforcement in line with national grid extension plans and expected growth in overall grid capacity. COST-SHARING METHODOLOGY FOR GRID CONNECTION Grid connection rules have an impact on the overall profitability, and therefore success, of renewable energy support policies. Even though other support mechanisms may be well established in a given country, discriminatory practices, regulations, interconnection standards and other rules might offset or seriously disturb the deployment of renewable energy projects. This is due in particular to the high cost for grid connection in relation to the total project costs. The European study GreenNet-Europe has calculated that, in the case of offshore wind power plants, grid connection can account for up to 26.4% of total investment costs. Even though the share is lower for all other renewable energy technologies, the methodology for cost sharing of grid connection is often essential when it comes to the decision as to whether a project is profitable or not (See Figure 2.3). Many REFiTs define the methodology used for dividing the costs for grid connection between the renewable electricity producer and the grid operator. Some legislators prefer to establish these rules in legislation for grid regulation. Essentially, three different methodologies can be applied to connection charging: the deep, the shallow and the super-shallow (Knight et al, 2005). The deep connection charging approach leaves the producer of renewable electricity with all costs, both for grid connection and for grid reinforcement. This includes the costs for the connection line to the next connection point and the costs for reinforcing the already established grid infrastructure. In the case of a lack of transmission capacity, the producer has to pay for the necessary upgrading. We do not recommend this approach. Historically, it was employed for large-scale conventional power plants. In the light of the high investments costs for these power plants, the additional expenditures for grid connection under the deep approach were negligible. This is different for renewable energy projects, which tend to have much lower overall costs per project than mammoth nuclear and coalfired units. Furthermore, the deep approach provides an incentive to produce electricity only in areas with a well-developed power grid. This makes sense in the case of coal and gasfired power plants but not in the case renewable energy projects. Wind power plants, for instance, should be built in the windiest locations and not just in regions with available grid capacity. As an alternative, the shallow connection charging approach was developed. It states that the renewable energy producer only has to pay for the new electricity line to the next grid connection point, while the grid operator has to cover all costs for potential reinforcement of the existing grid infrastructure. The costs covered by the grid operator will be passed on to the final consumer in terms of system charges. Under this approach, the renewable electricity producer will choose the location for the power plant depending on the resource availability (wind speed, etc.) and not infrastructure availability. It is also possible to mix both approaches. In this case, the power producer pays for the electricity line to the next connection point. The costs for grid reinforcement are shared between the grid operator and the electricity producer. Normally, the share covered by the producer depends upon the assessment of their proportional use of new infrastructure. This combination can be seen as a compromise between an incentive for using available grid infrastructure and choosing the resource optimal locations. A super-shallow connection charging approach was implemented in some European countries to promote the deployment of offshore wind power plants, particularly in Denmark and Germany. Connection lines from offshore wind fields to the nearest onshore connection point are rather expensive because of the long distances involved. To free the offshore wind power developers from this financial burden, legislators decided that even the costs for the new connection line from the offshore wind park to the next onshore connection point have to be paid by the grid operator. We recommend using the shallow grid connection approach or even the super-shallow grid connection approach. This allows for a strict separation of infrastructure investment and investment into new generation capacity. There is clearly a tendency for countries wanting to promote renewables to move away from the deep to the shallow connection charging approach. Whatever cost-sharing methodology regulators wish to apply, they must take the financial advantages (super-shallow approach) or disadvantages (deep connection charging approach) of green electricity producers into account when calculating the tariffs. The estimated costs for grid connection and reinforcement must be part of the tariff calculation methodology. EFFECTIVE ADMINISTRATIVE PROCEDURES The experience of some REFiT countries shows that, despite good economic and grid access conditions, generation capacity for renewable electricity does not increase significantly. The reasons for mediocre performance despite having the best designed REFiT can include administrative barriers such as long lead times for project approval, a high number of involved authorities and the lack of inclusion into spatial planning. 7 The European Commission, for example, recommends implementing quicker approval procedures for small-scale projects because they differ fundamentally from large-scale coal-fired power plants. It makes little sense to force both types of projects to go through the same administrative process. 8 Minimizing lead times One major administrative barrier for renewable energy projects is long lead times. In the EU, lead-times for small-scale hydropower development vary from 12 months (Austria) up to 12 years (Portugal and Spain). Policymakers can reduce this barrier by establishing a time limit on the entire approval process. National and local entities will be forced to deal with project permissions in due time, and organizations opposed to renewables will have less influence when it comes to non-economic barriers. Setting deadlines for the decisions of each authority will help, as long as authorities can keep them. Especially on a local level, administrative bodies often lack experience in dealing with industrial size projects. 7 Ragwitz, M. et al, 2007; Roderick, P. et al, 2007; Coenraads, R. et al, EU Commission,

16 Minimizing and coordinating the authorities involved Another important constraint for the development of renewables is the large number of authorities involved in the licensing process. In France, for instance, wind power producers have to get in contact with 27 different authorities at different political levels. In some Italian regions, up to 58 permits from different authorities are needed for smallscale hydropower plants. Complexity can be reduced by clarifying the responsibilities of each authority, and establishing a new organization dedicated to rapid renewable energy deployment, sometimes called a one-stop shop, to coordinate and simply the planning process. Most successful are those countries that authorize one single administrative body to deal with all subordinated authorities at different political levels. words at least (e.g. at least 20% by 2020 ). This way, targets do not have the negative effects of acting as capacity caps, where the deployment of new installation slows or comes to a halt once the target has been reached. Targets can be formulated as a certain share of renewables in the overall energy or electricity mix. This has been done by the German legislator who determined that the German REFiT scheme aims to increase the share of renewable sources in electricity supply to at least 30% by the year 2020 and to continuously increase that share thereafter. Alternatively, targets can also be established for the installed capacity. We recommend establishing targets for the short, mid and long term, thus establishing a pathway of how renewables can increasingly substitute fossil and nuclear power generation sources. CHECKLIST FOR A BASIC REFiT SCHEME To summarize this chapter, we have developed the following checklist that regulators (and anyone with an interest) can refer to when drafting a basic REFiT scheme. A webbased tool taking these dimensions into account is also available to help develop draft REFiT policies. 9 Choose the eligible technologies based on the resource availability in your country. Determine which kind of power production plants shall be eligible. Establish a transparent tariff calculation methodology based on the generation costs of each technology. Set technology- and size-specific REFiTs. Fix the duration of tariff payment (usually 20 years). Inclusion in spatial planning PROGRESS REPORTS Spatial planning provisions help to organize Last, but not least, evaluating and periodically the use of physical space in a given country, reporting on the state and progress of RE- Create a robust financing mechanism, such as stipulating where roads, industrial FiT programmes is crucial for long-term success. sharing the additional costs among all areas, power plants, and sewer systems Reporting and evaluation is usually the electricity consumers. should be located. Spatial planning at local task of the ministry that handles the policy. It Oblige the grid operator to purchase all level must anticipate future renewable energy projects by including them when drafting sary, recommends how it could be improved ensures that the law works well and, if neces- renewable electricity. or revising regulations and standards. In this or amended. In some countries, progress reports Grant priority grid access. provide the scientific grounds for peri- process the available resources, such as wind speed and solar radiation, should be identified. The German building code of 1996, for riodic revision guarantees stability for the odic amendments of REFiT schemes. This pe- Regulate the cost sharing for grid connection and reinforcement based on the instance, obliged each community to designate specific areas for the development of not be changed in the meantime, but it also producers, who know that the legislation will shallow or super-shallow connection charging approach. wind power projects. By those means, the gives politicians room for modifications. Create effective administrative procedures. legislator managed to shorten the administrative process considerably. for the first time, frequent adjustments might When regulators implement a REFiT scheme be necessary in the first couple of years. Progress reports typically include an analysis of mention them explicitly in the REFiT Set renewable energy targets and SETTING TARGETS the growth rates and the average generation legislation. Sometimes REFiT legislation is combined costs of all eligible technologies. They identify the economic, social and environmental Establish a progress report as the scientific the basis for future adjustments. with ambitious political targets for renewables. This has merit, as targets are important costs and benefits of renewable energy support (especially an estimate of greenhouse in signalling long-term commitment to investors. They indicate that support mechanisms gas reductions). They review the additional will be in place for a certain period of time costs for the final consumer. And they calculate the ecological effects of renewable ener- and they increase the likelihood of tariffs being sufficiently high. Targets should always gy plants, positive and negative, on nature be formulated as minimums by including the and landscape

19 Natural Gas = 58% Oil & Oil products = 40% Coal and Coal Products = 1% Hydro = 0.1% Biomass = 0.04% Power plant installed capacity 10,410 MW Algeria Energy Mix Electricity Generation Mix Electricity Stats Source: International Renewable Energy Agency, 2012 Thermal (gas & oil) 10,100 MW Large hydro 280 MW Concentrated Solar Power 20 MW Wind 10 MW Total 10,410 MW Electricity consumption per capita = 971 kwh Electrification Rate National = 99.3% Background & Policy Drivers Algeria was the first country in Africa to adopt a renewable energy Feed-in Tariff in However, the oil and gas rich country still heavily depends on thermal generation. Algeria is currently the largest oil producer in the Mediterranean region with more than 1.8 mb/d produced in 2010, about 36% of the total regional output. Unlike most other African countries, near universal electrification means increasing access is not an issue. Thus, the motivation for the introduction of a REFiT is slightly different. Algeria s national energy policy expresses the country s priorities in three principles: provide domestic consumers with sufficient and uninterrupted electricity, preserve energy resources to ensure the country s energy independence and promote exports in order to provide resources for Algeria s development. The three goals provide the basis for the model of national energy consumption, adopted by the Council of Ministers on 20 June The model, among others, puts an emphasis on the use of natural gas and liquefied natural gas currently plentiful in Algeria but also points to a progressive reduction of the share of hydrocarbons in the national energy mix and to the promotion and development of renewables. 1 Algeria adopted a renewable energy and energy efficiency development plan in February 2011, aiming at 40% of electricity production from renewables by The country wants to add 12,000 MW of new installed capacity mostly from solar generation. In addition, if Europe can guarantee demand and provide attractive concessional funding, Algeria will consider building a further 10,000 MW of renewables all dedicated for export. A key driver behind the promotion of renewable energy is the need for diversification of supply. Oil and gas reserves eventually will expire a major concern not only in Algeria. There may not be sufficient resources for local needs available as early as In 1 Supersberger, N. et al., 2010: p. 31. respect of long-term export commitments and rising fossil fuel prices, more diversification is urgently required. Other drivers supporting renewable energy and the establishment of a Feed-in-Tariff include the government s desire to avoid the development path taken with the hydrocarbon industry, where technology was imported and many of the benefits exported. Instead, the renewable energy sector is intended to help meet local demand, develop indigenous research capacity, promote local manufacturing and industry, and create jobs. A 2009 finance law stipulates that foreign investors can only hold up to 49% shareholding in an Algerian company; it increases bureaucratic hurdles for the approval of power sector activities with foreign ownership. And while repatriation of profits is allowed, foreign companies are encouraged to reinvest in Algeria. 2 In 2002, Algeria started a process of liberalization and unbundling of the country s energy sector, 3 which is still in progress. Privatization of power generation is permitted but electricity transmission, possibly distribution and all gas transport functions remain statecontrolled. Algeria has already seen the emergence of private projects, such as the 2005 Kahrama gas plant (80% owned by a US company) and the construction of a concentrated solar power (CSP) / natural gas hybrid plant at Hassi R mel by an Algerian- Spanish consortium. 4 Yet, Sonelgaz, the National Society for Electricity and Gas, still dominates the sector, exemplifying a statedriven approach with limited participation of private or civil society organizations. Algeria s renewable energy law was enacted in August , establishing a national framework for the promotion of renewable energy. 6 The 2004 renewable energy act was planned to help implement the 1984 energy strategy through the promulgation of four 2 Supersberger, N. et al., 2010: p Democratic and Popular Republic of Algeria, Supersberger, N. et al., 2010: p Democratic and Popular Republic of Algeria, A cost diversification law that is in effect a Feed-in-Tariff policy had been adopted earlier in March

20 Table 1. Algeria REFiT Design Features FIT Design Features Integration with Policy Targets Eligibility Algeria Goal to produce 40% of energy and 20% of electricity from renewables by : an additional 12,000 MW from renewable energy Gas with steam/hot water cogeneration Solar thermal/gas hybrid Waste-to-energy Hydropower Wind power Concentrated Solar Power / solar PV Power plant size cap: 50 MW Tariff Differentiation Technology Premium Tariff Payment Based On Payment Duration Payment Structure Cost Recovery Interconnection Guarantee Interconnection Costs Purchase and Dispatch Requirements Amount Purchased Purchasing Entity Commodities Purchased Waste-to-energy Hydropower Wind power Concentrated Solar Power / Solar PV Gas with steam/hot water cogeneration Solar thermal/gas hybrid 200% 100% 300% 300% 160% 200% Hybrid technology Share of solar component of a solar thermal/ gas hybrid power plant > 25% 20 <25% 15 < 20% 10 < 15% 5 < 10% Portion of useable energy recovered from gas electricity generation in the form of steam and/ or hot water: 20% < 20% 15 19% 10 15% Premium Tariff 200% 180% 160% 140% 100% 160% 135% 120% 80% Premium per kwh above a base tariff that may be intended to be the annual average price of electricity, but to date this has not been explicitly determined Not stated. Presumably negotiable or based on the project lifetime Annual payment based on an annual production quota set per project per year To be covered by the government. A National Renewable Energy and Cogeneration Fund (1% fee on petroleum royalties and other contributions) is one mechanism for this. Interconnection is guaranteed if interconnection facilities meet the standard of utility Paid by the generator. Where the grid operator makes the investment on behalf of the generator, these costs may be recovered from tariff payments Guaranteed purchase up to the annual production quota 100% of electricity outputpriority dispatch Government-owned single buyer (Sonelgaz) Electricity only Triggers & Adjustments Contract Issues Payment Currency entities with the remit to promote renewable energy. 7 In addition, a special renewable energy fund was established in 2010 and upgraded by an executive decree to a National Renewable Energy and Cogeneration Fund one year later. 8 Financed by a one per cent fee on petroleum royalties and other contributions, this mechanism under the responsibility of the Ministry of Energy and Mines will be used to recover the cost of the REFiT policy, as well as help co-finance national renewable energy and cogeneration projects. The 2004 Electricity Cost Diversification Law 9 obliges the system operator to connect renewable energy power plants, guarantee the purchase of power and pay a technologyspecific premium per kwh of electricity produced. 10 However, a renewable energy production quota is to be set per project and year. Power plants of up to 50 MW are eligible across all technology types. A minimum plant size is not set. The generator pays for the interconnection study while the system operator pays for connection costs, 11 with the caveat that the latter must be economically acceptable. 7 The National Observatory for the Promotion of Renewable Energies under the Ministry of Environment (awareness raising),7 the Centre for the Development of Renewable Energies (research & development, pilot projects), the Algerian Institute for Renewable Energy and Energy Efficiency (standards and regulatory instruments) and New Energy Algeria (electricity generation) 8 Democratic and Popular Republic of Algeria, 2009 and Democratic and Popular Republic of Algeria, Renewable energy production quota to be set per project per year. No adjustment for inflation, unless this is covered in the base tariff Negotiated on case-by-case basis Not stated. Key and unique features Concentrated Solar Power Unlike many countries in Africa implementing or considering a REFiT, the Algerian model includes a tariff for Concentrated Solar Power (CSP) in addition to solar PV, providing an indication of the importance placed on this technology type by the country. Solar is by far the renewable energy type with the highest potential in the country, followed by wind. Biomass, hydro and geothermal resources are either minimal, already exploited or not well known. Contract term Unlike most other Feed-in-Tariff policies, the Algerian REFiT law makes no reference to a contract term between a generator and the government-owned buyer (Sonelgaz). Presumably this is negotiable or follows precedents established by existing (thermal and wind) IPPs in Algeria. External factors The price of electricity in Algeria is among the lowest in the world, 12 and below the real cost of generation 13 due to the significant subsidies available for conventional energy sources that reduce the price for all consumers. 14 Given that the tariffs paid are expressed as an arbitrary percentage of this subsidized price, rather than calculated on the real cost of generation, even a REFiT tariff of 300% the average electricity price may not be sufficient to make renewables competitive. However, the measures Algeria has introduced to encourage local economic development and control increase the likelihood that domestic 10 For solar thermal/natural gas hybrid power plants and for thermal power plants that recover a portion of the waste heat from electricity production in the form of steam and/or hot water (known as co-generation ) the premium tariff is adjusted pro rata according 12 Fujiwara, N., Alessi, M., Georgiev, A., 2012: p. 8. to the per cent of hybridization/waste heat recovered. 13 Sonelgaz, undated. 11 MENA-OECD Energy Task Force, Fujiwara, N., Alessi, M., Georgiev, A., 2012: p

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